Government may have to draw down reserves to fund CAD: C Rangarajan
NEW DELHI: The influential Prime Minister'sEconomic Advisory Council (PMEAC) said the government may have to use its reserves to fund current account deficit (CAD) this fiscal, questioning Finance Minister P Chidambaram's assertion that capital flows would be enough to bridge the gap. It also provided a growth forecast that's more optimistic than most, citing the monsoon effect and a likely revival in investment.
The council, headed by former Reserve Bank of India governor C Rangarajan, lowered its growth forecast for the year to 5.3% from the 6.4% it predicted in April. That's still better than the 4% estimate of 2013-14 growth by most private analysts.
It also suggests a slight revival, following the slump to a decadelow 5% pace last year.
PMEAC pegged current account deficit at $70 billion, same as in the detailed plan announced by Chidambaram on August 12 in Parliament to address the issue. But it estimated capital flows at $61.4 billion.
"In view of the likely decline in net capital inflows, India will have to draw down its reserves by around $9 billion to bridge CAD," PMEAC Chairman Rangarajan said while releasing the Economic Outlook for 2013-14.
"We also expect that, like last year, there will be a small accretion to reserves at the end of the current year," Chidambaram had told Lok Sabha on August 12. A $70-billion deficit is 3.7% of GDP.
India had to draw down $12.8 billion from its reserves to finance current account deficit of $78.2 billion in 2011-12. The country managed to add $3.8 billion to reserves in 2012-13 after financing current account deficit of $88.2 billion. The council's growth forecast is based on 4.8% growth in agriculture, up from 1.9% on the back of a good monsoon, and a 2.7% rise in industrial output, up from 2.1% and driven by rural demand. Services are expected to slow to 6.6% from 7.1%.
"The main factor pushing up growth is the farm sector directly on account of faster growth of farm incomes and indirectly by lifting rural demand for manufacturers," the council said, adding that the government's attempts to revive investment will begin to show results in the second half of the year.
Economists disagreed with PMEAC's buoyant growth forecast. "Our projection is a little lower," said DK Joshi, chief economist at CrisilBSE -0.49 %. "We see growth at 4.8% in current fiscal as investments will not pick up significantly." Rajiv Kumar, senior fellow at theCentre for Policy Research, said, "I don't see a recovery in the second half as investment is down and there are no signs of it coming up. Services sector is also down."
The council does not see any case for a rating downgrade, but advocated midcourse corrective measures to contain fiscal deficit at the budgeted level of 4.8% of GDP and mediumto long-term measures, including a stable non-reversible policy regime, early resolution of transfer pricing disputes and improving manufacturing capabilities to boost the economy.
"Ratings agencies need to read our report," Rangarajan said in reply to a question on the threat of a downgrade. "The rating agencies have been talking about the reforms having been put on the back burner. But that is no longer true... Many important legislations were passed (recently)... Therefore, I would think the rating agencies have no case for any downgrading," he added.
The council, headed by former Reserve Bank of India governor C Rangarajan, lowered its growth forecast for the year to 5.3% from the 6.4% it predicted in April. That's still better than the 4% estimate of 2013-14 growth by most private analysts.
It also suggests a slight revival, following the slump to a decadelow 5% pace last year.
PMEAC pegged current account deficit at $70 billion, same as in the detailed plan announced by Chidambaram on August 12 in Parliament to address the issue. But it estimated capital flows at $61.4 billion.
"In view of the likely decline in net capital inflows, India will have to draw down its reserves by around $9 billion to bridge CAD," PMEAC Chairman Rangarajan said while releasing the Economic Outlook for 2013-14.
"We also expect that, like last year, there will be a small accretion to reserves at the end of the current year," Chidambaram had told Lok Sabha on August 12. A $70-billion deficit is 3.7% of GDP.
India had to draw down $12.8 billion from its reserves to finance current account deficit of $78.2 billion in 2011-12. The country managed to add $3.8 billion to reserves in 2012-13 after financing current account deficit of $88.2 billion. The council's growth forecast is based on 4.8% growth in agriculture, up from 1.9% on the back of a good monsoon, and a 2.7% rise in industrial output, up from 2.1% and driven by rural demand. Services are expected to slow to 6.6% from 7.1%.
"The main factor pushing up growth is the farm sector directly on account of faster growth of farm incomes and indirectly by lifting rural demand for manufacturers," the council said, adding that the government's attempts to revive investment will begin to show results in the second half of the year.
Economists disagreed with PMEAC's buoyant growth forecast. "Our projection is a little lower," said DK Joshi, chief economist at CrisilBSE -0.49 %. "We see growth at 4.8% in current fiscal as investments will not pick up significantly." Rajiv Kumar, senior fellow at theCentre for Policy Research, said, "I don't see a recovery in the second half as investment is down and there are no signs of it coming up. Services sector is also down."
The council does not see any case for a rating downgrade, but advocated midcourse corrective measures to contain fiscal deficit at the budgeted level of 4.8% of GDP and mediumto long-term measures, including a stable non-reversible policy regime, early resolution of transfer pricing disputes and improving manufacturing capabilities to boost the economy.
"Ratings agencies need to read our report," Rangarajan said in reply to a question on the threat of a downgrade. "The rating agencies have been talking about the reforms having been put on the back burner. But that is no longer true... Many important legislations were passed (recently)... Therefore, I would think the rating agencies have no case for any downgrading," he added.
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